Quick answer: An audit is designed to support an opinion on historical financial statements under an applicable reporting framework. A Quality of Earnings analysis is transaction-focused: it helps a buyer, seller or investor understand how reported earnings were generated, how sustainable they may be and which adjustments or risks matter to the deal.
An audited set of financial statements can be an important source for due diligence. It does not remove the need for deal-specific analysis. Similarly, a QoE report is not an audit opinion and should not be described as one.
QoE vs audit at a glance
| Area | Financial statement audit | Quality of Earnings analysis |
|---|---|---|
| Primary purpose | Opinion on whether historical financial statements are presented under the applicable framework. | Decision support for a transaction, investment or financing process. |
| Main user | Shareholders, regulators, lenders and other financial-statement users. | Buyer, seller, investor, lender or lead deal adviser. |
| Scope | Defined by auditing standards, materiality and the engagement. | Defined by deal questions, risk areas, available data and agreed scope. |
| Typical focus | Historical balances, transactions, disclosures and controls relevant to the audit. | Recurring earnings, adjustments, revenue quality, working capital, net debt, cash conversion and forecasts. |
| Output | Audit report and opinion, supported by audit documentation. | Databook, earnings bridge, findings, exhibits, issues and transaction implications. |
| Forward-looking work | Limited to matters relevant to the financial statements and going concern. | Often includes forecast bridges, assumption review and scenario analysis. |
What an audit tells you
An audit adds confidence to historical financial reporting. The auditor plans procedures around risk and materiality, obtains evidence and forms an opinion on the financial statements. This work may include testing transactions and balances, evaluating accounting policies and considering relevant internal controls.
For a deal team, audited statements can improve the starting information set. They may also surface matters such as modified opinions, emphasis paragraphs or control observations that deserve transaction-specific follow-up.
However, the audit opinion does not normally answer the buyer’s central commercial questions: Which earnings are recurring? What EBITDA adjustment is supportable? What working-capital level is normal? Which customers drive growth? What cash or debt-like items could affect completion accounts?
What a Quality of Earnings analysis tells you
QoE analysis works from the transaction objective back into the numbers. It reconciles reported earnings, tests important trends and builds a transparent view of adjustments. The analysis should explain both the amount and the evidence behind each conclusion.
- Reported-to-adjusted EBITDA bridge.
- One-off, exceptional, non-operating and owner-related items.
- Run-rate changes and whether they are supported.
- Revenue and margin by customer, product, channel or location.
- Customer concentration, churn, retention or project pipeline where relevant.
- Cash conversion and working-capital requirements.
- Potential net-debt or debt-like items.
- Historical-to-forecast bridge and key sensitivities.
The precise scope varies. Some QoE assignments are narrow and focus on a few earnings questions; others form part of wider financial due diligence.
Why audited profit can still need deal adjustments
An item can be correctly recorded under the accounting framework and still require separate consideration in a transaction analysis. For example, a genuine restructuring cost may be appropriately expensed, while the deal team still evaluates whether it is recurring. Conversely, an expense labelled “one-off” by management may recur every year and therefore remain part of maintainable earnings.
QoE adjustments are not automatic accounting corrections. They are analytical judgements that should be supported by records, management explanations and a clear definition of the earnings measure used in the transaction.
How audit and QoE work together
The two workstreams can be complementary. Audited statements provide a structured historical base. QoE then reorganises and interrogates that information around the deal. Where the QoE process identifies inconsistencies, unusual journals or weak source data, the deal team may decide that additional accounting, tax, legal or operational work is required.
The lead team should confirm independence requirements, reliance, permitted use and access to working papers or management before assuming that work from one engagement can be reused in another.
When do you need a QoE?
- The purchase price uses an EBITDA or earnings multiple.
- Management presents significant add-backs or run-rate adjustments.
- The business has changed rapidly through growth, acquisition or restructuring.
- Monthly management information differs from statutory reporting.
- Revenue is concentrated, project-based or dependent on renewals.
- Working capital, cash conversion or debt-like items could affect value.
- The seller wants to prepare a defensible databook before buyer diligence.
Start with the financial due diligence checklist to map the core workstreams. If the lead firm needs analytical capacity, Plus One offers FDD and QoE outsourcing support aligned to its scope and review model.
Director at Plus One Management Services with KPMG experience across transaction support and financial due diligence. This article is general information and is not an audit, accounting, transaction, tax or legal opinion.